Speaking at Senate hearings today, Kevin Warsh, the administration’s nominee for the chairmanship of the Fed, repeated his view that the central bank should stick to its core function. That was bad news for those who have tried to get the Fed to use its powers to advance a progressive agenda, a classic post-democratic strategy that has advanced further in (surprise!) the EU than, despite earlier missteps, in the U.S.
From the New York Times:
Senator Bill Hagerty, Republican of Tennessee, asks Warsh about the “divisive partisan policies” he says have distracted the Fed, including diversity, equity and inclusion and climate change. (Both the Fed and the regional banks have studied these issues, which have deep implications for the economy.) Warsh agreed, saying the Fed should “stick to its knitting,” and blamed the Fed’s shift toward taking into account a broader spectrum of demographics for the inflation surge of 2022.
Quantifying how diversity, equity, and inclusion affect the economy is not straightforward. Devising policies to respond to any such effects is the business of legislatures and, to a degree, the executive. It should be nothing to do with the Fed. So far as climate change is concerned, the Times reporter takes it as a given that it has “deep implications for the economy.” That is debatable (which is not to say that it will have no implications).
However, it is hard to believe that a changing climate represents any short-to-medium threat to the financial system sufficiently serious to merit the attention of the central bank. A more relevant question is the destructive economic effects of policies designed to combat climate change, most notably the energy “transition.” Such policies have long been backed by the ECB, the eurozone’s highly politicized central bank, which therefore bears its share of responsibility for the economic damage they have caused. While the Fed had shown some signs of taking a more climatist tack in the past, those days have rightly passed. For now.
More from the New York Times:
Senator Tina Smith, Democrat of Minnesota, pressed Warsh on the inflationary effects of climate change, especially insurance rates, which have been driven up by extreme weather events like hail and flooding. The question of whether climate change has fueled inflation overall is complex, but economists have found that it is raising costs for Americans. Warsh essentially dodged the question, making an argument about how prices have risen more slowly in less regulated parts of the economy.
Climate change may contribute something to inflation, but only at the margin. And while we’re on that topic, it is worth considering the impact of climate policies on inflation, growth, and, given the capital demands associated with them, interest rates.
The increase in insurance rates cited by Senator Smith is indeed partly affected by occasional extreme weather-related events (a number that is trending up) combined with the fact that more people have moved to areas that are, so to speak, in storms’ way. And people who move to such areas are often choosing more expensive housing than what had been typical of those parts of the country. Substantial increases in reconstruction costs have not helped either. Something similar can be said about fire damage, although the picture is complicated by the way that forestry mismanagement has contributed to the toll.
All that said, there is little that a central bank can do about this. The rising cost of insurance is a market response to perceived or actual climate risk. If the result is more climate-conscious settlement or construction, that is as it should be. If that risk is overstated, it represents a market opportunity for an insurer to cut prices.
The most likely source of systemic financial risk — something that should concern the Fed — arising out of this issue would be if insurers were underpricing (or were forced by regulators to underprice) climate risk. A secondary worry is uninsurability (or, if a matter of sky-high costs, effective uninsurability). This is a mounting problem but, from the perspective of the central bank, one that only becomes a concern if it becomes a significant threat to lenders exposed to uninsurable assets or to economic activity in the affected regions. From a policy perspective, there is nothing the Fed should — and not that much that legislators could — do about this. After all, no climate-related policies will change the climate any time soon. The best response to a changing climate is improved resilience and, more broadly, adaptation. The best way to achieve that is by fostering the economic growth necessary to pay for it.
There, a sound-money Fed can help.